Offshore LNG Projects will not make a Substantial Contribution to the Budget

24 may 2016

“Offshore natural resources extraction projects as well as liquefied natural gas projects are complex and expensive, and when you combine the two types of project into one, both complexity and price go up accordingly. With the current level of global energy prices, the prospects of these kinds of projects are less and less certain,” said Alexander Kurdin, Head of the Department for Strategic Studies in Energy of the Analytical Center, speaking at the 13th International Conference "Exploring the Russian Shelf and LNG - 2016."

In his report titled The Economics of Offshore LNG
Projects in the New Realities of Energy Markets, Mr. Kurdin cites the
following figures: in early 2016 natural gas prices fell to USD 150 per
thousand cubic meters in Europe and USD 250-320 per thousand cubic meters in
Asia. They are going to grow eventually but in the less than favorable scenario
the probable price corridors will be USD 260-280 per thousand cubic meters in
Europe (in 2014 USD) and USD 330-370 per thousand cubic meters in Asia by
2025.

At the same time the cost of building an LNG infrastructure
for offshore projects (in addition to the extraction elements) have
significantly increased in recent years and are estimated at USD 1,200-2,000
per million tons of capacity per year. With all the other CAPEX taken into
account and given the somewhat lower prices of materials, this translates into
natural gas production costs including CAPEX of USD 100-150 per thousand cubic
meters. In other words, the breakeven price for offshore LNG projects would be
at least USD 250 per thousand cubic meters (before taxes). So it is no surprise
that in this situation a number of foreign LNG projects have been canceled or
postponed recently.

Under the current market conditions, we cannot expect
Russian offshore LNG projects to make a substantial contribution to the budget.
However, in theory they can begin to pay back for themselves and make a modest
profit when the price of oil is at least USD 60 a barrel. The state support is
offered to such projects not because the government expects to make money off
them but because they are promising in terms of regional development and
technological advancement.